Expense Explosion
Scott Clements, RS, Reserve Studies Inc. Cory Neubauer, NEXTIER Insurance Services, Inc. Kyle Wolack, Keystone, AAMC
The May luncheon, Expense Explosion, was the second in a two- part series and expanded on the information provided during the April economic update program. These programs were coordinated as part of the Chapter’s ongoing effort to provide quality financial information and guidance to homeowners associations (HOAs) and business partners.
Economic Update
The Federal Reserve (FED) lowered its target rate to 3.75% to 4.00% at the September Full Open Market Committee (FOMC) meeting citing concerns about the weakening jobs report data. The FOMC projected target rates of 3.6% by the end of 2025, 3.4% in early 2026, 3.1% in early 2027 lasting to at least 2028 during the September meeting.
The U.S. annual budget will continue a majority of the 2017 tax policies. Analysts believe that it should produce better gross domestic product (GDP) growth than if the tax policy were to revert to pre-2017 levels. It is also projected to create greater annual deficits in the short to mid-term, causing the national debt to increase over the next decade. Moody’s Corporation, a leading investment advisor, downgraded U.S. debt on May 16th, 2025, citing the debt level. While not unexpected, as it followed their competitors, it was none the less a shock to the U.S. system of debt servicing. The speakers noted that the national debt is about $36 trillion and increases by about $6.94 million per minute.
As the Federal Reserve’s target interest rates decline, HOAs will see their interest in bank accounts and Certificate of Deposit (CDs) also decrease. Decreasing yields on HOA reserve fund investments, such as CDs, will increase pressure on boards of directors to increase assessments as tax equivalent yields on CDs decline well below the Bureau of Labor Statistics inflation rates for Orange County (as reported for August) of 3.30% for CPI-U, 3.20% CPI-less food & energy, and 3.9% for services. The average quarterly reconstruction costs for all building trades in California, which has the greatest impact on future reserve expenditures, came in at 5.63% in July.
(Editor’s Note: Inflation, Federal Reserve (FED) rates are current as of Oct. 22, 2025)
What’s Driving the Surge?
The program highlighted some of the contributing factors that caused the hyperinflation experienced by the HOA world over the last few years.
16 November | December 2025 Insurance Premiums
According to insurance industry estimates, natural disasters since 2017 have caused the property insurance market collectively to lose more than 40-billion dollars. The industry has responded by requesting, and often receiving, permission from the California Department of Insurance for significant increases to the premiums consumers pay. Additionally, maps the California insurance industry relies upon in determining its risk have been updated to include the most recent information, including the devastating fires of the last decade. Fire hazard zones have been expanded and now include thousands of homes that were not located in previous fire hazard zones when they were constructed.
Premium increases have varied significantly based on the unique circumstances of each HOA. Most of the increases (ranging from 200 to 700 percent) have exceeded any standard inflationary metrics, and in many cases have caused the HOA to seek temporary relief in the form of special assessments, borrowing from its reserve fund, or reducing coverage. The challenge for HOA members is these property insurance premiums are expected to continue their upward trajectory.
Legal and Compliance Costs
It was noted “The Balcony Bill,” now codified as California Civil Code § 5551, is still relatively new, and the industry is now feeling the financial effects of funding the exterior elevated elements inspections. Most properties, particularly older structures, have some level of deferred maintenance, so many of these reports call for immediate expenditures to correct issues discovered during the inspection process. Some regular items are often seen on a reserve study, such as deck coating. However, other reports highlight damage to structural elements and include restoration costs that may not have been previously included in the budgeting process. These unanticipated expenses can rapidly drain reserve funds not accounted for in previous financial planning.
The annual budget report (§ 5300) continues to grow in scope and size, taking longer to assemble, create and distribute. Compliance with this ever-growing list of documents causes additional questions for board members and management, increasing their need and reliance on legal counsel. Voting procedures, meetings and postings, certain rules and regulations, financial disclosures, insurance policy updates, dispute resolution – the list goes on and on. These additional requirements which have been added over time have increased the volunteer board member time, and the paid professional time it takes to successfully operate an HOA.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36
